For Immediate Release
July 2, 2012
Anthony I. Blenkinsop, Director, Charitable Trusts Unit
Senior Assistant Attorney General
New Hampshire Attorney General Michael A. Delaney announced today that the New Hampshire Center for Public Policy Studies (NHCPPS) has issued its report on executive compensation at New Hampshire's nonprofit hospitals. The Attorney General has statutory and common law authority to protect the public's interest in the assets committed to charitable purposes and commissioned the NHCPPS to conduct the study in 2011. The review was to determine if the trustees of New Hampshire's nonprofit hospitals meet their fiduciary responsibilities in setting executive compensation, and to examine the types and variations in executive compensation among the hospitals.
The report finds that most hospitals follow the process established by the Internal Revenue Service (IRS) for determining executive salaries. However, these hospitals do not necessarily follow the same process in determining other forms of executive compensation including hiring and retention agreements, bonuses, and perquisites. These additional forms of compensation can, in some circumstances, constitute a significant portion of an executive's pay package. The Report also finds that for most hospitals there is a correlation between hospital size and levels of compensation paid to the chief executive officer (CEO). The data does not however show a significant correlation between CEO compensation and hospital performance measures such as quality of care, cost of care, or charitable care provided. Given these hospitals exist to provide quality health care and are required to provide community benefit and charitable care in light of their non-profit status, the lack of such a correlation is a significant concern.
The Report found that in using IRS guidelines to set compensation, there is a potential "log-rolling" effect created. As long as other hospitals are "moving the log forward" with similar levels of compensation, the industry remains in compliance with the IRS guidelines. Hospitals are supposed to use a range of salaries when setting their CEO compensation. In actual practice hospitals tend to target the 75 percentile, and often higher, in setting their CEO's compensation. This creates an upward spiral and executive compensation can grow at a rate disproportionate to relevant measures of achievement, or to increases experienced by other sectors of the population. This appears to have been the case even during the significant economic downturn experienced since 2008.
All of New Hampshire's 23 nonprofit hospitals were included in the review conducted by the NHCPPS. This is a small group and within the group there are significant differences in size, geographic area served, population density within the area served, and types of hospitals. For these reasons it is important to consider differences and the impact of outliers when drawing conclusions. For example, the Report shows that the average total compensation paid to a CEO in New Hampshire was $485,664 in 2008. The highest CEO compensation ($1,359,848 at CMC) was nearly three times the average, while their patient revenue only fourth highest. The average CEO compensation for all hospitals drops by 8% when CMC is excluded from the calculation.
While the IRS guidelines state that nonprofit hospitals must use appropriate data to determine reasonable compensation, they do not require that performance measures be included in the Board's deliberations. Most hospitals do report measuring CEO achievements as part of the compensation review process. The Report considered three performance measures (quality of care, cost ranking, and the amount of charitable care provided) and found no strong correlation between performance and compensation levels. These measures are appropriate as community benefit is the standard used by the IRS for determining whether a hospital qualifies for tax-exempt status. The lack of apparent correlation may mean that the Report's performance measures do not align with those used by the hospitals. However, given the import of the performance measures used in the Report, it may also indicate that other factors, such as the log-rolling effect, have a stronger influence on compensation than performance.
The Attorney General stated "It is the role and responsibility of the Department of Justice, through the Director of Charitable Trusts, to ensure all nonprofits, including nonprofit hospitals, carry out their fiduciary duties and direct all of the charity's resources towards accomplishing its mission." One of the most direct and consequential actions the trustees of nonprofit hospitals take to meet these duties is approving the chief executive's compensation. Given this, it seems clear that New Hampshire's hospitals and their Boards must go beyond the IRS' minimum standards in determining executive compensation and move in the direction suggested in the Report's recommendations. Recommendations include the use of a broad set of comparisons in setting compensation and connecting compensation with performance measures. In addition the same level of consideration and Board oversight should be applied to all forms of executive compensation including hiring and retention incentives, annual bonuses, retirement plans, and other perquisites.
In response to the Report's recommendations concerning annual data collection and reporting, Anthony Blenkinsop, the Director of the Charitable Trusts unit stated: "This office will consider what changes, if any, need to be made in reporting requirements, both in terms of the data reported and the due dates so that adequate and current information is given appropriate levels of review."
The report provides substantial information, and makes transparent the process used in determining executive compensation, and the levels of compensation paid at New Hampshire nonprofit hospitals. The Attorney General states that these findings will provide a basis for public discourse regarding nonprofit hospitals, their charitable mission, and their executive compensation.
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